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What is a 1035 Exchange?

March 31, 2021

A 1035 exchange is a provision in the tax code that allows you, as a policyholder, to transfer funds from a life insurance, endowment or annuity to a new policy, without having to pay taxes. The IRS allows holders of these types of contracts to do this in order to replace outdated contracts with new contracts that have improved benefits, lower fees and different investment options. A 1035 exchange is limited to the following situations: You can replace one annuity contract for another annuity contract that has identical annuitants; You can replace one life insurance policy for another life insurance policy, endowment policy or annuity contract; And you can replacing one endowment policy for an identical endowment policy or an annuity contract. The IRS has provided strict guidelines that the owner, insured and annuitant must be the same on the new contract as listed on the old in order to qualify for the tax-free treatment. The IRS has ruled in several previous cases that if an owner cashes out of a current contract and immediately applies the proceeds to a new contract it will not be treated as a tax-free event or Section 1035 Exchange. The funds must pass directly from one insurance company to the other. Contact us today to make sure you take advantage of this tax strategy correctly.